'It is going to be brutal'

After meeting with state legislative leaders last week I came away with one clear conclusion - towns and cities will see cuts in state aid. That would allow the governor and lawmakers to say they did not raise taxes again, but for many it will mean tax increases nonetheless - property tax increases.

The bad fiscal news just keeps coming. Last week the Malloy administration reported a new deficit projection of $65 million. Underperforming sales tax revenues were identified as the chief culprit. Just last month the administration and legislature worked to fill a projected $365 million deficit. The fix was clearly not enough.

Meeting in his office at the Legislative Office Building, Senate President Donald Williams told me the failure of the budget to balance is attributable to the underperforming economy. The sluggish recovery has simply not produced the tax revenues necessary to support state spending, he said.

But when I got the chance to meet with the Republican Senate minority leader, Sen. John McKinney, he noted that was not the whole story. The state is also spending more and the projected savings the administration attributed to the concession deal with the state labor unions have fallen well short.

"Sometimes the urge to say, 'I told you so' is overwhelming, but I don't want to do that. No matter how we got here, we've got to deal with it," said Republican House leader Rep. Larry Cafero, explaining why he wasn't going to say, "I told you so."

He reminded me Republicans said in 2011 the budget plan the governor constructed with his Democratic majorities in the House and Senate was based on some unrealistic assumptions and would not work. But he wasn't telling me so.

Things now get tougher. Given current trends the anticipated deficit for the fiscal year that starts July 1, the first in a two-year budget plan that Gov. Dannel P. Malloy releases Feb. 6, is north of $1 billion.

The almost certain reduction in municipal aid comes by process of elimination. Malloy has said he will not again raise taxes. Politically he can't. He pushed hard for a record $1.5 billion tax increase to fix the budget crisis he inherited, assuring citizens that such a sacrifice, combined with labor concessions, would get the state back to good fiscal health. The governor cannot come back to voters and say he needs more, not if he wants to seek re-election in 2014.

Also off the table are large cuts in labor expenses. Instead labor costs will rise. After a two-year wage freeze surrendered in concession talks, unionized state employees are guaranteed no layoffs for another two years and raises over the next three, totaling a 10 percent increase over that time.

Theoretically, the governor and legislature could try to borrow their way out of the problem, but that would invite another downgrade by credit agencies, with the resulting higher interest rates eating up any savings.

"Though the deficit is smaller, I would argue that the state is in worse shape now than when the governor took office. Why? Because our tool box is empty," said Cafero. "We are in a mess."

Asked for possible solutions, Cafero leaned forward and said, "Fraud. Crack down on fraud." He offered tax fraud and Medicaid fraud as targets.

If the state can more aggressively go after fraud, great. The federal government, which shares the expense of Medicaid with states, reimburses 75 percent of the cost of fraud investigators, said the minority leader. But investigating, proving and blocking fraudulent payments takes time and will not produce the kind of savings needed to close the large deficit.

The Republican Senate leader, McKinney, suggested shifting management of all social services to the private, non-profit sector, which has a track record of providing such services more cheaply. "We could save $300 to $500 million annually," he told me.

Again, maybe another good long-term idea, but with the layoff protection, those state programs will not be transferred to the private sector anytime soon. Even under ideal circumstances a transition would take years and the state labor unions will fight any such move. Also, those non-profits are howling that they aren't paid enough by the state now.

The Senate's top Democrat, Williams, said he awaits the governor's ideas and avoided offering any specific proposals on how to fix the projected deficit for the next fiscal year. He did offer this preview: "It is going to be brutal … just really ugly."

When I suggested that cutting municipal aid seems unavoidable, none of the three disagreed. McKinney said such cuts would have to come with a reduction in state mandates. Williams said municipalities have to get serious about regional approaches that can cut their collective costs. And Cafero said disgustedly what a raw deal it will be to take away funding from towns and cities, particularly for education, after making a big deal of funding education reform.

"It's like telling your kid they can't continue in college because you blew all the tuition money at the casino," said Cafero.